Introduction
A family business is a profit-making entity that entails the significant roles of decision making, ownership, and leadership of the business being undertaken by several generations of a family. For a firm to be considered as a family business, the multigenerational element, and the unique family is fundamental (Carlock, Kets de Vries, and Florent-Treacy 12). Family businesses vary from size to industry; there are corner shops with a history of family ownership and leadership and similarly publicly listed multinationals, which share a similar foundation (Carlock, Kets de Vries, and Forest-Treacy 17). Internationally, there are numerous examples of family-owned businesses; case in point, in the apparel industry, the Gap, H&M Hennes & Mauritz, Ralph Lauren, and Levi Strauss & Co. are among the most successful family businesses according to the Family Business Index ranking. The Gap is a publicly multinational business traded on the New York Stock Exchange (NYSE) as GPS. It is a retail company that deals with clothing and accessories. It was founded in 1969 by Donald and Doris F. Fisher in San Francisco (Gap Inc). The Fisher’s play a vital role in the leadership of Gap, Inc. H&M Hennes & Mauritz is similarly a multinational company in the retail-clothing industry, traded as HM-B on the Offset Market Exchange (OMX). Erlin Persson is the founding father of H&M, which was established in 1947 in Sweden. This report evidences the success of these two multinational family businesses as well as the challenges they face. Family businesses can be as successful as non-family businesses.
Analysis
Investment Philosophies
The type of investment philosophy a company uses in its decision-making process is important this is because it guides the direction of investment and consequently the success of the company. In comparing the two companies, Gap Inc is more inclined toward the growth investing philosophy than its counterpart. This is due to the high competition in the American fashion industry as compared to that of Sweden. The growth investing philosophy which entails buying into companies which exhibit growth potential due to promising new products or services. Gap Inc employs this investment philosophy; this company has made many acquisitions among them Banana Republic – a safari themed apparel business, in 1983, Athleta in 2008, and Intermix in 2012 (Gap, Inc. “Annual Report 2014” 2). Gap has remained focused on acquiring other businesses as an investment philosophy however H&M is not inclined to this particular type of investment as evidenced by the lack of recent acquisitions.
In comparison, both H&M and Gap share the fundamental investment philosophy. The philosophy of fundamental investing, which involves making investments in companies with strong prospects concerning earnings is also common in both firms. The introduction of Old Navy at Gap Inc was to focus on the benefits of investing in fashion. Gap is also aware of the prospects of investing in middle-income countries and has focused its investment efforts in countries such as Philippines, Mexico, and South Korea (Gap Inc. "Annual Report 2014" 3). Similarly, H&M has also invested in fashion launching its Collection of Style brand in 2007 (Walker 24). The focus on fast fashion is due to the prospects of high earnings associated with this aspect of the industry.
Succession Planning
Historically, both family businesses appear to have a comprehensive though predictable succession plan in place; one that entails being succeeded by their children. At H&M, Karl-Johan Persson is the chief executive and third generation from the founder Erlin Persson to be involved in the family business. Karl-Johan – Erlin’s grandson became the CEO of H&M in 2009 and has held that position since then. Stefan Persson – Karl Johan’s father was the CEO from 1982 – 1997 and from 1998 he became the chairman (H&M, “2013 Annual Report” 1). After Don Fisher's passing away in 2009, his fortune was inherited by his three sons Robert, William, and John Fisher. Don Fisher's wife Doris Fisher, who is also a founding member of The Gap, is an honorary board member at the company. William Fisher has held numerous positions at the company and has played a vital role in expanding the business's international presence. Robert Fisher has been on the board of directors at The Gap since 1990 as well as served as the company's chairman for three years. All of Donald Fisher’s children and his wife Doris have been involved in the business in different capacities; currently, Robert Fisher represents his family as the Chairman of the company (Gap, Inc. “2014 Annual Report” 1). In the past, the chairman of the company has held the CEO position in case a leader was ousted or resigned; when Paul Presler resigned in 2007, Robert served as CEO.
In comparison, the two family businesses illustrate their involvement in the company in different capacities. At H&M, the family plays a more active role with Karl-Johan as the president and CEO of the company and his father Stefan Persson as the company’s chairman. The Fisher’s role in the active running of the business has diminished with the three Fisher sons and their mother – Dorris Fisher simply being members of the board which limits their influence on the day to day running of the business. The Fisher family's ownership and leadership are in its second generation while that of the Persson family is in its third generation. Family businesses face the stereotype of poor governance as the widespread perception is that the succeeding generations are incapable of being objective; it is thus essential to analyze the governance of both H&M and Gap, Inc.
Governance
Corporate governance is an integral component of business as it is essential for building a positive reputation. An effective organizational structure is an indispensable building block for any successful business. In family businesses, there might be a conflict of interest arising from the family members, and this affects the governance of the firm and consequently its success. At H&M corporate governance team constitutes Board of Directors, shareholders, and the management. The Board of Directors manages affairs of the company on the shareholder’s behalf. The individuals at the company are guided by internal rules, regulations, external laws, and recommendations (H&M “Corporate governance report” 5). H&M as a family business has family representatives on the board of directors. Similar to H&M, Gap, Inc. has board of directors of 11 members – 9 of who are independent directors, a separate chairman, and CEO as well as corporate governance guidelines which have been approved by the board (Gap, Inc. “Governance” par 2). The two family businesses pride themselves on instituting as well as upholding strong business ethics practices and maintaining constant communication with relevant stakeholders such as shareholders and customers. Business ethics and company values are an essential part of any business endeavor.
Ethics is an important part of governance especially concerning family businesses. A positive reputation promotes customer loyalty which leads to return business. In terms of corporate ethics and governance, H&M is a world leader as it illustrates best practices of governance. In 2014, H&M was named the World’s Most Ethical Company by an independent research group (Gap Inc). According to Berent-Braun and Uhlaner, (23), H&M's founding family is believed to exhibit professionalism as the family sets aside its interests to promote good governance and promote shareholders' interests. Family businesses are associated with poor governance presumptions, but as observed at both H&M and Gap Inc this is not the case. Good governance at a family business is typically linked to the ownership structure of the organization.
Ownership Structure
The structure of ownership of a company refers to the individuals and institutions who own a significant number of shares as well as voting rights. In a family business, the ownership structure is an important influence on governance as the owners of the business make the decisions. Therefore to ensure that a company remains in the family there is a need for the family to remain part of the ownership structure. The ownership structure of H&M is topped by the Stefan Persson family and Related companies which have over 600 million shares – 38.3% of the shares, and 70% of the voting rights (H&M "Ownership structure"). The Lottie Tham and related companies follow with 88 million shares – 5.4% of the total shares and a 2.6% voting of voting shares (H&M “Ownership structure”). These two groups represent the family’s interest in the company.
Gap Inc ownership structure constitutes shares held by major direct holders, institutional holders and mutual fund holders. As of August 2015, John, William, and Robert Fisher held over 40 million of the company’s shares (Gap, Inc., “Ownership” 2016).
In 1974, H&M became a public company and is currently traded on the OMX Nordic Exchange in Stockholm. The shares were distributed to Erlin Persson’s three children, who now own the majority shares (H&M “Ownership structure”). The Persson family including the current CEO Karl-Johan owns 38% of H&M; the family worth is estimated at 25.7 billion euros (Finnigan 1).
Financial Performance
As multinational corporations, both H&M and Gap Inc are financially equipped to succeed. However, Gap Inc is behind H&M concerning financial performance. In 2013, Gap Inc reported revenue of $ 15.651, had an operating income of $1.135, assets amounting to $ 7.47, and equity at $ 2.894 billion (Gap Inc “2013 Annual Report” 47). The following year, Gap Inc revenue rose to $ 16.148, operating income was $ 2.149 billion, assets - $ 7.849 billion and equity also increased to $3.062 billion (Gap Inc “2014 Annual Report” 49). The number of employees at Gap Inc totaled 13700 by May 2014. In 2013, H&M reported revenue was at SEK 150. 09 billion, operating income of SEK 22.168 billion, and total assets and total equity at SEK 65.676 billion and SEK 45.248 billion respectively (H&M, “Annual Report 2013” 53). The number of employees at H&M by March 2015 was 132 000. According to the Financial Times, Gap, Inc’s market capital is at $7.398 billion and the market capital for H&M is $394.53 billion. Currently, the earnings per share for Gap, Inc are $2.23; while that of H&M is at 11.98. In comparison, H&M is ahead of Gap Inc in terms of financial performance. This is especially due effective strategic planning.
Strategic Planning
H&M’s strategies focus on the prevailing concerns of the business and its environment and this is a contributing factor to the company’s success. The company is focused more on increasing sales volumes through effective marketing strategies. Advertising is a common marketing strategy for H&M. The advertising policy of the company is spread a positive message regarding the company as well as seek feedback from customers through carrying out regular customer surveys. Regarding production, H&M outsources this to its 700 suppliers (H&M, “Annual Report 2013” 57). H&M is geared toward social and environmental sustainability. In 2014, the chief executive Karl-Johan Persson was presented with an award due to his efforts to improve working conditions which are a common cause of concern in the textile industry as well as improve wages (Finnigan 1).
Gap Inc.’s strategic planning is geared toward increasing productivity. In a 2015 press release in San Francisco Gap Inc announced its aim to improve productivity through streamlining its workforce in a bid to consistently deliver unique and compelling products to their customers using different avenues (Gap Inc “Strategic Initiatives” par1). Gap Inc. could improve their financial performance by refocusing their efforts toward more effective marketing strategies. Advertising is essential for a business to remain relevant and successful especially in the fashion industry.
Conflict Area
In family businesses conflict often arises concerning the line of succession and relinquishing leadership and ownership of the business. From recent research, 56% of the leaders and owners of family businesses are likely to retain some element of control even after succession to ensure a successful transition (PwC par. 1). Trust is an important factor in the case of family business successions. This is illustrated by H&M’s Stefan Persson’s decision to remain, chairman, while his son was the CEO. Stefan Persson has two sisters, however, the company was left to him by his father this is potentially a conflict area for the family and consequently for the business.
Challenges
There are numerous difficulties that face family businesses. The first is the intergeneration transition; selecting the track of future ownership and leadership in a family business is a complicated endeavor. In the case of H&M, there has always been a family representative in the company's affairs from Erlin Persson to Stefan Persson to the current CEO Karl-Johan Persson. It raises questions on whether the fourth generation of Persson’s is ready and willing to take over after Karl-Johan. PwC estimates that 47% of the next-generation of family members perceive an increasing age gap between those in the line of succession and the current leadership (PwC par.1). It is due to the hands-on approach that the older generations apply that limits, the younger generations from acquiring necessary experience in running the business. According to PWC US Family Business Survey, the proportion of American family businesses which do not have a documented plan of succession especially for senior leadership roles is 73% (PwC par. 9). From the history of the Persson and Fisher families, business ownership and leadership has remained in the family, however, there is the risk of the company's ownership being watered down in subsequent generations due to conflicts within the family and disputes of succession.
Evaluation
Family businesses are associated with many misconceptions. First, the efficiency of family businesses in comparison to their counterparts is doubted. Family businesses are also perceived to undergo more challenges due to the multigenerational traditions and lack of individual competence. Family businesses have overcome these stereotypes to become some of the most successful multinational organizations in the world, and this is as a result of the kinship. These problems, however, do affect family business to some extent. The main reason for the success of the family business is due to the excessive competition presented by other family businesses as well as non-family businesses which bring families together to ensure the success and continuity of their business (Berent-Braun and Uhlaner 26). According to Porter, there are five types of competitive forces that might influence the decisions of family business ownership and leadership.
Porter’s Five Competitive Forces
The fashion industry is a very competitive one and for both H&M and The Gap the threat of their success arises from different areas. There is low threat of new entrants this is due to the high costs of designing, marketing and distribution. H&M and The Gap are current players in the fashion industry who use existing benefits such as economies of scale to restrict the entry of new players and thus securing their positions. The two companies possess a high supplier bargaining power this is due to their nature as multinationals, which allows them to access adequate supplies in terms of raw material and labor from the developing world. In terms of the third aspect – bargaining power of buyers (Porter 77). It lies between medium and high for both companies due to the high competition. The threat of substitute products is high between the two companies; this is because their goods are substitutes in terms of quality and price. The last aspect – rival among competing firms (Porter 81); is medium to high this is due to the competitive prices, introduction of new products, and advertising battles between The Gap and H&M, which is a common phenomenon in the fashion industry. For Gap and H&M to continue their success it is absolutely necessary to respond promptly to their competitor’s business moves and strategies.
Recommendations
Conclusion
A family business is one in which the associated family makes a significant proportion of the decisions, and; thus, leadership and ownership are both under the control of the said family. The apparel industry evidences a number of successful multinational public traded companies that are also family businesses. This article comparatively analyses The Gap and H&M Hennes & Mauritz in order to describe the unique nature of family businesses. In comparison Gap, Inc. is more inclined toward the growth investing philosophy; the two family businesses both lean toward the fundamental investment philosophy. With the Fisher’s family in their second generation of leadership and ownership and the Persson’s family in their third, succession planning is an important aspect of the business. Deducing from historic patterns both families are likely to remain in senior positions at their companies though in less active positions such as board members. Gap Inc. and H&M both possess a similar corporate governance structure which entails a board of directors and a separate CEO and chairman. These positions are also where most owning family members are represented. Both companies exhibit high standards of business ethics. The two family businesses also maintain their positions at the company by remaining highly ranked on the ownership structure. With regard to financial performance, H&M has in the recent times illustrated a better performance as compared to Gap Inc. H&M is inclined toward marketing strategies while Gap Inc. is more focused on productivity strategies this could be the reason for the deviation in financial performance. Porter accesses the five forces of competition in businesses that influence strategies; for the two companies to successes they must evaluate their competition accurately. The best recommendation for family business challenges is to implement an effective succession plan that would equip subsequent generations with necessary skills to lead the business. Family businesses can be successful as illustrated by H&M and Gap Inc, however, accurately evaluation competition and employing effective business strategies as well as proper governance is essential.
Works Cited
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H&M “Annual Report 2013” Hennes & Maurtitz, 2013. Print
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Porter, Michael E., The five competitive forces that shape strategy Harvard Business Review, 86.1 (2008): 78-93. Print
PwC. Majority of US Family Business Leaders Don’t Have Robust Succession Plan in Place, PwC U.S. Family Business Survey, January 13, 2015. Print
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Appendix
Rating Key: VL=Very Low; L=Low; M=Medium; H=High; VH=Very High; N/A=Not Applicable.
